Deciding on the best type of Business Ownership

type of Business Ownership

South Africa is a country with endless possibilities for growth and economic expansion.  A key driver of this potential is the success of business ventures operating by South Africans in the country. When considering starting your own business, an important factor to consider is the type of business you want to own. This post will help guide you on the different basic types of business ownership available to you.

Sole Trader or Proprietor
This is the simplest form of ownership. It is characterised by one individual owning and operating the entire business. The individual assumes all financial responsibility and receives all profits generated by the business. A common starting point for many businesses, this option offers no capital restrictions. The business does not operate as a separate legal entity which means there is increased liability for the owner.

Partnerships          
Another common form or ownership, this option involves multiple partners taking on the responsibility of managing and financing the business. Partners share in profits and assume legal responsibility for debts incurred. This option provides a cost-effective way of running the business through sharing of responsibility in addition to giving the advantage of having multiple perspectives on various decisions. If managed carefully, these perspectives could foster a flourishing business environment. Essentially, a strong bond of trust is needed.

Co-operatives
These are jointly owned and democratically controlled by al members. Multiple people or companies unite for a common economic or social purpose to form a co-operative, which functions as a separate legal entity. There is the advantage of having pooled resources; however, there are usually low returns on capital.

Close Corporation
Operating as a separate legal entity, this option gives members reduced liability. Restricted to 10 members, CCs are mandated by the Close Corporation Act 69 of 198 and the Companies Act 21 of 2008. It should be noted that close Corporations are no longer available as new entities in South Africa.

Companies are seen as legal entities; which means that the company in this regard has the capacity to act on its own. They are often subject to strict legislation. A memorandum of Incorporation (MOI) must be filed, which represents the company’s founding statement.

There are two type of companies; namely profit and non-profit.

Profit companies can be further sub-divided into:
Private ’Pty’ Ltd
Personal Liability Companies ‘Inc’
Public Companies ‘Ltd’
State-Owned ‘SOC’ Ltd

Private:
These companies may have unlimited shareholders and provide ease of transfer of ownership. They must have at least one director and members have limited liability. Shares cannot be offered to the general public and members are required to hold an annual general meeting. Regulated by the Companies Act 71 of 2008, Private companies must register for tax purposes.

Personal Liability:
There is joint liability for shareholder and directors; however there are fewer transparency requirements. These companies are not required to submit audited financial statements.

Public Companies:
Shares are offered on the open market, which allows the company to raise capital this way. These companies require at least 3 directors and are subject to a high degree of transparency. All information about the company is available for the public and the number of shareholders is unlimited.

State-owned companies:
Created by the government, these companies are also viewed as part of government from a legal perspective. They are share companies, in which the government has the controlling share. A major advantage is that funding is provided by government; however this may lead to the disadvantage of limited decision-making, with legal formalities complicating operations.

Non-Profit companies have a structure that is similar to other companies, but has a few differentiations such as:

  • Profits that are generated are required to generate more work.
  • Profits cannot be shared among members.
  • There is no share distribution of shares or paying of dividends.
  • There is an alleviation of legal restrictions.

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